Cigarette Taxes Fuel Black Market Sales

WASHINGTON -- While 2012 was a relatively mild year in terms of cigarette and tobacco tax increases, 2013 is shaping up to be significantly more treacherous: President Obama has proposed a 94-cent-per-pack increase to the federal excise tax; a variety of states--including Vermont, Minnesota and California--are following suit with proposals to raise state taxes on cigarettes by anything from 80-cents-per-pack (Vermont) to $2-per-pack (California). The argument for such increases typically comes down to two points: funding both federal and state budgets and lowering smoking rates.

Yet, data suggests that drastic increases to cigarette excise taxes can actually damage both the budgets and smoking rates they intend to aid. Lyle Beckwith, NACS' senior vice president of government relations, made an argument about the link between higher cigarette taxes and black market sales in an op-ed for USA Today.

"There is a direct correlation between increased excise taxes and black market sales," said Beckwith, citing a 2010 report by the Bureau of Alcohol, Tobacco, Firearms and Explosives. "Tax hikes have caused a nationwide black market for cheap illicit cigarettes. That has led to contraband cigarettes robbing state and federal governments of more than $5 billion in taxes--about 16% of total federal and state cigarette excise taxes collected annually."

Beckwith noted that states with high excise taxes, such as New York, Rhode Island and Washington, also have the highest rate of black market sales: it has been estimated that more than half the cigarette sales in New York are contraband.

"The source of these contraband cigarettes varies from low-tax states, to Native American reservations to illegal and counterfeit product smuggled in from overseas," he said. "Simply raising the tax rate in low-tax states will not deter smugglers; it will only shift them to other low- or no-tax sources. This problem has been created and exacerbated by the constant rise in excise taxes."

And, while the goal of cigarette excise taxes may be to fund budgets and deter smokers, cigarettes sold on the black market do not contribute to state of federal taxes and often do not require age verification to purchase.

Convenience stores, on the other hand, have had an active role in ensuring that no one under 18 purchases cigarettes; 17 years ago, c-store retailers helped form the We Card coalition. Before the existence of We Card, Beckwith's data suggests minors were able to purchase tobacco 76% of the time; the most recent FDA numbers show that rate has now dropped to 5.65%.

"In a perfect world, convenience stores would be agnostic about tobacco tax increases," said Beckwith. "As long as everyone is paying the tax, we all compete on a level playing field. But it is not a perfect world. Study after study shows that attempts to socially engineer behavior through increased taxes produce a far different outcome than intended, with the black market the main beneficiary."